Über die Autorinnen und Autoren

Kati Suominen serves as Resident Fellow in Economics at the German Marshall Fund and as American Assembly's Next Generation Fellow. From 2003 to 2010, she was a Trade Economist at the Inter-American Development Bank, where she advised senior economic policymakers around the world, led the Bank's global and Asia-Pacific trade policy research, and originated and executed loans for trade and competitiveness across the Americas. She has published eight books, most recently Globalization at Risk: Challenges to Finance and Trade, and has spoken in leading business and policy forums across the Americas, Asia, and Europe. A frequent contributor to VoxEU.org, Suominen has been interviewed by CNN, Bloomberg, BBC, Financial Times, Time, US News and World Report, USA Today, Washington Post, and Politico.

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PEERLESS AND PERILED

Stanford University Press

Contents

Acknowledgments........................................................................ixPreface................................................................................xiIntroduction: Leadership Renewed.......................................................11 Rebalancing the World Economy........................................................512 Rescuing the Rescuer: What Should a Twenty-First-Century IMF Do?.....................903 Ruling Out Crises—or Deglobalizing Finance?....................................1314 Endangered Reign? Dollar's Dilemma...................................................1785 Central Banking at a Crossroads......................................................2026 The Myth of America's Decline........................................................225Notes..................................................................................249Index..................................................................................299

Chapter One

I call on the surplus countries ... to find the political gumption to stimulate their economies without reigniting the fires of inflation. It must be recognized that the health of the world economy does not hinge solely on US budget policy. As US budget and trade deficits decline, other countries must pick up the slack, particularly on imports from developing countries. Our focus—and this means all of us—must be on achieving balanced growth and more open economies. —President Ronald Reagan, IMF–World Bank Annual Meetings, Washington, 29 September 1987

AS THE WORLD BEGAN EMERGING FROM THE FINANCIAL CRISIS, global imbalances rebounded. In a lopsided pattern whereby the United States and many other nations such as France, India, and UK imported and borrowed, while China, Japan, Germany, and Middle Eastern oil producers exported and lent, imbalances soared in the early 2000s, reaching some 5 percent of world GDP by 2006. That year, US current-account deficit peaked at an unprecedented 6.5 percent of US GDP, a level widely viewed as unsustainable. Confidence in the US economy was expected to erode, and the dollar was deemed to fall. Exasperated by the mass influx of imports, Congress threatened steep tariffs against China. Perpetuating low US real interest rates that, in turn, stoked the housing bubble, the imbalances became one of the main culprits for the Great Crisis. It would also take the crisis to unwind them.

The risks of a world out of balance are several, from bouts of currency wars to trade protectionism and a new global economic crisis sparked by a hard landing in America. The International Monetary Fund (IMF) argues that imbalances are "a major concern for the sustainability of the recovery over the medium term" and that advanced-economy current accounts will "make increasingly negative contributions to growth." The European Central Bank echoes the warning, stating that imbalances "pose a key risk for global macroeconomic and financial stability."

At Washington's prodding, the G20 has made the imbalances the centerpiece of its agenda and created a peer review process of the members' economic policies. Success at rebalancing will be the key barometer of the G20's relevance. Unlike the other items on its agenda—financial regulations, reform of the IMF, global trade liberalization, and so on—that will ultimately be dealt with in other forums, global imbalances are the G20's core competence. Indeed, the story of the various prior Gs, starting with G4 in the 1970s, is a story of imbalances—and it is a story of US economic fortunes and clashing national interests. The group has addressed the imbalances grudgingly, only when the US economy ailed and Congress reverted to a staunchly antitrade mood. The collaboration, while difficult, had its successes, most notably the historic Plaza Accord of 1985.

The stars may seem to be aligned for rebalancing. Three of the critical factors that propelled the adjustments in the 1980s are again in place: floundering American demand, sour US trade politics, and a forum that encompasses all actors required for a solution. However, none of the main surplus nations—China, Germany, or Japan—is poised to adopt consumer-led growth strategies, while the United States is running steep budget deficits that continue to require heavy foreign borrowing. The G20 has no enforcement mechanisms to compel rebalancing, and no major economy will comply with its international commitments if those clash with domestic political imperatives—let alone overhaul its policies because other G20 nations decide it should. At the same time, Washington's bilateral carrots and sticks that compelled Japan and Germany to adjust their policies in the past—security guarantees and a credible threat of steep tariffs—are not available against China, America's main counterpart in the global cycle of money. Why the failures to tackle imbalances in the past? And what measures should the United States take to tame them—before they undo the global economy?

Uneven Balancing

The global hegemons of the past two centuries, the UK and the United States, have repeatedly run current-account deficits. Britain went through a century of chronic trade deficits from Waterloo in 1815 to World War I, despite holding captive export markets and serving as the creditor to its vast empire. The US current account was in the red for most years in 1790–1875, the heyday of America's expansion, as the New World brimmed with investment opportunities and lacked savings. Foreigners—particularly the British but also the Germans, Dutch, and the French—stepped in, funding America's railroads and canals and helping to create a continental economy.

The pattern rebounded in the late twentieth century. After World War I, the United States replaced the UK as the world's largest creditor nation; after World War II, America emerged as the premier global exporter. But as Europe and Japan recovered and industrialized, the United States, an open and fast-growing market, was on its way to becoming a net importer. Declining in the 1960s, US trade balance turned negative in the early 1970s. The Kennedy and Johnson administrations sought remedies, such as persuading European nations to purchase military hardware from the United States in order to offset the negative impact of US military expenditures in Europe on US balance of payments. But the Vietnam war–related deficits, tight labor market, and loose monetary policy decreased the US current account. Paul Samuelson, the future winner of the Nobel Prize in economics, argued that US balance of payments policy had turned "from benign neglect to malignant preoccupation."

The Nixon administration's solution, in 1971, was to break the straitjacketing gold peg. But floating exchange rates gave rise to a new worry: that countries with devalued currencies would pose unfair competition in global commerce. This was a disquieting prospect at the time, when soaring oil prices and inflation were already causing economic havoc. Worried, Treasury Secretary George Shultz convened his counterparts from West Germany, France, and the United Kingdom in Washington in April 1973.

Grudging Cooperation

Schultz's "Library Group," named after its venue, the ground-floor...